Global Economics

Europe Hangs Tough on Euro Rules

European finance ministers rejected a call from France to loosen budget deficit caps for countries using the euro

Finance ministers from the 16-member euro area rejected on Monday night (8 June) French proposals to weaken the budget deficit rules that underpin the common currency area and reconfirmed their support in the European Commission as the principal watchdog.

"We all agreed that the [European] Commission has to be the guardian of the Stability and Growth Pact," Spanish Finance Minister Elena Salgado Mendez said of the rules while speaking to journalists in Luxembourg after the meeting.

Economy commissioner Joaquin Almunia said the pact—softened in 2005 due to pressure from the French and German governments—was already sufficiently flexible to allow the necessary stimulus spending to boost the economy.

Mr. Almunia added that it was important for governments to get an idea of when the current stimulus spending was going to stop and the move to improve balance sheets would start.

Current commission forecasts predict a return to growth for the area by mid-2010.

"That will be an appropriate time to start moving in the direction of the consolidation of accounts," he said.

Last week French Economy Minister Christine Lagarde suggested current rules that allow government deficits to exceed three percent of GDP for only limited periods and under exceptional circumstances should be watered down.

"We should think about a special treatment for the debts currently acquired as a consequence of the crisis," she told Financial Times Deutschland in an interview.

The discussion on deficits comes as the commission and member states carry out a mid-term review of budgetary policy and on the same day that a report by the International Monetary Fund said that the timing of economic recovery for eurozone was "uncertain".

The report by the international lender called on euro nations to carry out a "resolute and coordinated clean up of the banking system" and highlighted the need for member states to stress test banks.

Finance ministers from the EU's 27 members will continue the debate on budgetary deficits on Tuesday, with the meeting expected to sign off on a document on the subject for EU leaders to discuss at their meeting in Brussels on 18-19 June.

Juncker to stay on

Ms. Salgado was standing in as chair on the monthly meeting euro finance ministers—known as the Eurogroup—for Luxembourg prime minister Jean-Claude Juncker who is currently forming a new government having won a fourth term in parliamentary elections on Sunday.

A recent announcement by Mr. Juncker that he intended to give up his twin post as Luxembourg's finance minister has given rise to speculation that he would also draw to a close his time as chairman of the Eurogroup.

However on Monday Mr. Juncker said that he hoped to remain in the position, possibly by holding on to a number of economic duties.

"Depending on the outcome of the governing coalition negotiations, I could go on with part, or the entire (portfolio) of the treasury ministry," Mr. Juncker told the German Press Agency.